Buy, Sell Or Hold: Diamond Bank Plc

Two months ago I reviewed Diamond Bank Plc 2013 Q1 results and suggested I’d decline to buy if a buy opportunity was presented to me. So what has changed since that review? Their 2012 Annual report is finally out and given me an opportunity to look through the books of the Bank, particularly what the Chairman and MD had to say.

By all means Diamond Bank should be amongst the top 5 banks in Nigeria today. Rather it finds itself trailing the likes of Access Bank and GTB in terms of Total Assets and struggling to distance itself from Skye Bank and Fidelity Bank in terms of Net Assets. 2011 was a pivotal year for the banks as it marked the dawn of reality for the banks that had mainly stayed on sidelines whilst its competitors entrenched their reach into the retail and corporate banking sector of the economy. Their slow expansion rate and inability to quickly adopt modern banking practices such as internet banking and cash-less banking will hugely impact on their ability to increase deposits. Net Customer deposits only rose 25% between the last five years from 2009 compared to about 72% for GTB and Zenith’s 63%. Diamond Bank also exposed themselves to various classed of risk assets which the bank ultimately had to write off in 2011 and 2012. These sent the bank’s distributable reserves to a negative N7billion in 2012 (N24billion in 2011).

Gladly, the bank has recognised its failings and have decidedly choses a more radical, risky but profit making turn. They have decided to increase their branch presence, invest in modern IT infrastructure in a bid to catch up with the likes of GT Bank. Much of these new investments will be funded from the banks proposed Equity raising of $750million out of which they have since gotten $200million. They have also increased their loans and advances, increasing it by 50% year on year to December 2012. The bank has also introduced a very important personality in Mrs Ifeuko Okaru (former Chairman of the FIRS) as non-executive director. Her wealth of experience in taxes and connections in the public sector will surely help the bank in its quest to broaden the banks influence.

But the far more compelling influence in making an investment choice for Diamond Bank will have to be its low intrinsic valuation by the market. Diamond Bank stock has risen 181% in the last one year. However, the stock is still priced at 91% of its Net Assets Per share and still has a low P.E of 4x.Even the management recognises this as a problem and a negative to their capital raising efforts. Companies hate to hit the market with public offers when their share price is underpriced. This is where I find opportunity. A cheap stock with moderately good fundamentals is an offer that is hard to decline for me. I hate bank stocks as their financial statements are too long to read. For that reason, holding them in my portfolio on the long run is a risk I really don’t enjoy. But for the short-term, Diamond Bank is a Buy for me.

I instructed my stockbrokers to purchase the stock yesterday, 10/6/2013

Ugo Obi-chukwu "Ugodre" is a chartered accountant with over 16 years experience in financial management, corporate finance and financial analysis. He is also a retail investor and a personal finance advocate with over a decade experience investing in the Nigerian stock market.
Ugo is the founder/Publisher of Nairametrics and blogs regularly on the website.

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